A consolidation of power among the coalition of losing presidential candidate Prabowo Subianto in the House of Representatives (DPR) threatens president-elect Joko Widodo’s ability to carry out planned reforms. Widodo will attempt to weaken Prabowo’s coalition ahead of his inauguration on 20 October in the hope of strengthening investor confidence, which has weakened significantly since his victory in July. Despite these efforts, major political barriers will continue to impact his administration and delay key reforms, undermining economic growth in the final quarter of 2014.

Prabowo’s “red-and-white” (KMP) nationalist six-party coalition has remained intact since his loss in the election, and continues to hold 63 percent of the seats in the DPR. At the opening session of the DPR on 2 October, Widodo’s Democratic Party of Struggle – Indonesia (PDI-P) stormed out of the session, leaving the KMP free to elect its representatives as the speaker and the four deputy speakers of the house. The walkout came after the KMP voted on 26 September to scrap direct local elections in Indonesia, a controversial move strongly opposed by Widodo and up to 80 percent of the public. Widodo himself rose to politics through the scrapped elections, and is the first Indonesian leader to come from outside a small cadre of military-backed politicians.

The vote was seen by pro-democracy groups as a way to undermine the progress of democratic governance in Indonesia and increase the power of the elite in Jakarta, returning the electoral system to the era of the Suharto dictatorship. The KMP claimed the change was required because direct elections were expensive and more prone to corruption than a system of appointments by legislative bodies. The vote marked an early defeat for Widodo and signalled KMP’s stark opposition to his incoming administration. The law could help the KMP paralyse Widodo’s ability to govern in the long term if it manages to maintain a majority in the DPR, as more than 200 new local leaders including 11 provincial governors are set to be appointed in the course of 2015.

The KMP’s consolidation of power has raised fears over the incoming administration’s ability to implement Widodo’s planned reforms, and had an immediate negative impact on investor confidence. Indonesian stocks fell at the fastest pace worldwide following the 2 October opening of the DPR, with a total of USD 344 mn of foreign funds withdrawn from shares by the end of the trading week on 3 October. If uncertainties continue, international trading houses have warned that property and banking stocks may be hit particularly hard. This contrasts with a positive reaction to Widodo’s victory in July, which saw a 27 percent increase in construction, property and real estate stocks on expectations that he would bring in new infrastructure projects and open up the property market to foreign investment. The Indonesian Chamber of Commerce and Industry has also warned that business and growth prospects are being damaged by the politicking and political uncertainty ahead of Widodo’s inauguration on 20 October.

Widodo and the minority coalition of PDI-P now face an elevated threat, as the KMP seeks to expand its influence further before the inauguration. It has indicated that it will seek control over key commissions and boards that provide oversight of mandatory and spending-specific sectors, including Commission VI overseeing trade, industry and state-owned enterprises and Commission VII overseeing energy, mineral resources and environment. KMP control over these boards would mean that any cabinet ministers appointed by Widodo could face significant obstacles from oversight bodies. In light of the KMP’s recent victories, Widodo now faces the prospect of handing out key cabinet positions, such as the Energy and Mineral Resources Ministry, as concessions to even out the political playing field.

The success of Widodo’s attempts in the next two weeks to reach out to parties within the KMP will be critical to convince investors that the new administration will not be paralysed by the DPR. Widodo indicated on 1 October that two parties were in the process of joining the PDI-P coalition, although he refused to name them. Previous suggestions that the Democratic Party, which is the largest party in the DPR with 11 percent of the seats, could offer its support were undermined by the party abstaining from the vote to scrap local elections. Similarly, the Golkar party was expected to leave the KMP after the presidential loss, but Prabowo has managed to maintain the integrity of the coalition. Widodo needs both Golkar and the Democratic Party to defect from the KMP in order to gain a majority in the DPR. Both coalitions are also attempting to secure control over the People’s Consultative Assembly (MPR), Indonesia’s main legislative branch comprising the DPR and the Regional Representatives Council (DPD). The election of Oesman Sapta—a West Kalimantan regional representative with close connections to the PDI-P—by the DPD on 7 October as a candidate to lead the MPR with the most votes out of eight other nominated candidates suggest the Widodo may yet be able to offset the KMP’s influence.

Efforts to weaken the KMP coalition in upcoming weeks will be critical to Widodo’s ability to implement reforms. Stronger influence in the MPR offered by Oesman’s victory would help Widodo and the PDI-P offset the KMP’s dominance in the DPR, alleviating some of the current pressure. Nonetheless, the KMP coalition’s influence in the DPR and ongoing efforts to expand political influence mean that early planned reforms, including fuel subsidy removal, reforms to the inefficient tax collection system and reduced bureaucracy are all likely to be slowed, having knock-on effects on economic performance. Although far too early to conclude that the reform agenda has been derailed, it seems that political barriers are likely to slow reforms, politicise policy-making and dent the early investor optimism that met Widodo’s election.

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